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(originally published by Booz & Company)


Paradox of Capitalism

Frankly, I don’t quite understand why Lehman didn’t go into Chapter 11. Now, maybe it was too small, or it wasn’t prepared to go into Chapter 11. But in general I don’t see why Wall Street firms are in any greater danger of Chapter 7 liquidation when they can’t pay their bills than any company in the real economy. Even Citigroup: Presumably it is worth more alive than dead. Its creditors would much rather that it stay afloat to pay off its loans than disappear completely. And it has a lot of assets — not necessarily physical assets, but a very strong customer base and a lot of talent. No one would support that it would cease to exist if it chose Chapter 11.

S+B: So you see the contours of the bailout as little more than a successful marketing effort?
It’s a giant public relations campaign. But I’m not sure that anyone consciously regards it as such. The Treasury Department traditionally has been Wall Street’s embassy in Washington. Treasury secretaries traditionally are closely allied with Wall Street. I’m sure Hank Paulson views Citibank or Morgan Stanley or his old hunting ground, Goldman Sachs, as profoundly different from a manufacturing company or another major services company. The funny thing is, I think that Paulson would be aghast to think of what he did as industrial policy. But of course that’s exactly what he did.

S+B: Might that opposition to setting industrial policy explain why the bailout of the banking sector has been so much easier to sell than the bailout of Detroit?
Detroit’s clout in Washington has diminished, while Wall Street’s influence has grown. The House Committee on Energy and Commerce has traditionally represented Detroit’s needs, and the United Auto Workers [UAW] union has had a powerful presence in Washington for many years. But Michigan Representative John Dingell, who headed up the House committee, has been stripped of his chairmanship and the UAW is losing members. So Detroit increasingly seems less politically important, although obviously the states that feed into the auto industry — Pennsylvania, Ohio, Indiana, and Illinois, as well as Michigan — remain critical battleground states when it comes to presidential elections. But there are many other states that have their own auto industry that happens to be owned by non-American firms. All of this turmoil among the U.S. automakers and their backers adds up in the end to a loss of importance in Washington, except perhaps at election time. And that makes it increasingly difficult for the Big Three to get what they want from D.C.

I expect that the likely outcome for the auto industry would be a kind of cross between Chapter 11 and public bailout, not unlike what happened to Chrysler in the early 1980s. Every stakeholder will be required to sacrifice, and that means creditors, shareholders, executives, and blue-collar employees, to ensure that there is enough money on the table for Detroit to restructure itself. Taxpayer dollars have already been added to that money, but only on the condition that the other stakeholders make real sacrifices and that there is a restructuring plan.

Today, the management of the Big Three seems to believe that if they can only get through the recession, they’ll be fine. They view their challenge as primarily cyclical. They may be right technically, but they’re wrong over the long haul. Their challenge is structural. They’ve been losing market share for years, they’ve been producing cars that the public doesn’t want. Few young car buyers would ever think to buy an American car anymore. The Big Three have to come up with an entirely different vision of their industry and of their operations, and I hope that that is part of any bailout.

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  1. Tony Judt, “The Wrecking Ball of Innovation,” New York Review of Books, December 6, 2007: Historian Tony Judt takes issue with Reich’s essentially passive approach to curing the problems of supercapitalism.
  2. Robert Reich, Supercapitalism: The Transformation of Business, Democracy, and Everyday Life (Knopf, 2007): Reich makes his case for reasserting the role of democracy in “democratic capitalism.”
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